DP5232 Non-stationary Hours in a DSGE Model

Author(s): Yongsung Chang, Taeyoung Doh, Frank Schorfheide
Publication Date: September 2005
Keyword(s): Bayesian econometrics, DSGE models, non-stationary hours
JEL(s): C32, E52, F41
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5232

The time series fit of dynamic stochastic general equilibrium (DSGE) models often suffers from restrictions on the long-run dynamics that are at odds with the data. Relaxing these restrictions can close the gap between DSGE models and vector autoregressions. This paper modifies a simple stochastic growth model by incorporating permanent labor supply shocks that can generate a unit root in hours worked. Using Bayesian methods we estimate two versions of the DSGE model: the standard specification in which hours worked are stationary and the modified version with permanent labor supply shocks. We find that the data support the latter specification.